Income/Franchise:
Pennsylvania Supreme Court Affirms Refunds and Sourcing Revenue Under “Benefits-Received” Policy

Case No. J-16-2022, Pa. (2/22/23). The Pennsylvania Supreme Court (Court) affirmed a Pennsylvania Commonwealth Court ruling from 2020 [see Case No. 108 F.R. 2016, Pa. Commw. Ct. (7/24/20) for more details on this 2020 ruling], which held that a Pennsylvania-based taxpayer was entitled to claim state corporate net income tax (CNIT) refunds for the pre-2014 tax year at issue by sourcing certain service revenue outside of Pennsylvania based on the Pennsylvania Department of Revenue’s (Department) longstanding policy of interpreting the relevant statutory “costs of performance” sourcing provisions using a “benefits-received method” in calculating the sales factor. Under the Department’s established sourcing method policy, an income-producing activity for purposes of the CNIT “costs of performance” statutory provisions generally is deemed to occur at the location where the customer received the benefit of the service. The Pennsylvania Attorney General unsuccessfully argued that given there are no definitions in the relevant statute and no regulations or other formal authority on point, the benefits-received method should not apply and therefore the taxpayer was correct in its original CNIT filing when it applied a more traditional “costs-of-performance” analysis in sourcing the receipts from its services predominantly to Pennsylvania. The Court ultimately agreed with the taxpayer, as well as intervening counsel from the Department, that the taxpayer’s sales of services should be sourced according to where customers received the benefits of its services (i.e., at the customer’s location) rather than where it incurred the costs of performing those services. Accordingly, the Court affirmed remanding the case to the Pennsylvania Board of Finance and Revenue for calculation and issuance of a tax refund by the Department to the corporate taxpayer for the 2011 tax year at issue. A concurring opinion and a concurring and dissenting opinion follow. Please contact us with any questions.